Archive for the ‘Related Civil Litigation’ Category

Friday Roundup

Friday, October 24th, 2014

SEC administrative proceedings, a sorry state of affairs, voluntary disclosure calculus, nice payday but what was really accomplished, and for the reading stack.  It’s all here in the Friday roundup.

SEC Administrative Proceedings

A focus on SEC administrative proceedings here at the Wall Street Journal.

“The Securities and Exchange Commission is increasingly steering cases to hearings in front of the agency’s appointed administrative judges …”

For discussion of this dynamic in the FCPA context, see my article “A Foreign Corrupt Practices Act Narrative” (pgs. 991-995).

“SEC administrative settlements, as well as SEC  DPAs and NPAs, place the SEC in the role of regulator,  prosecutor, judge and jury all at the same time and a notable  feature from 2013 SEC FCPA corporate enforcement is that 4 (1  NPA and 3 administrative orders) of the 8 corporate enforcement  actions (50%) were not subjected to one ounce of judicial  scrutiny.”

In 2014, there have been three SEC corporate FCPA enforcement actions (Smith & Wesson, Alcoa, and HP).  All have been resolved via the SEC’s administrative process.

Sorry State of Affairs

It really is a sorry state of affairs when former government enforcement attorneys go into private practice and then criticize the current enforcement climate that they helped create.  For more on this dynamic in the FCPA context, see this prior post “A Former Enforcement Official Is Likely To Say (Or Has Already Said) The Same Thing.”

Albeit outside the FCPA Context, this ProPublica article, “In Turnabout, Former Regulators Assail Wall St. Watchdogs,” touches on the same general issue.

“Last week, I visited an alternate universe. The real world sees a pandemic of bank misconduct, but to the white-collar defense lawyers of Washington, the banks are the victims as they bow beneath the weight of regulators’ remarkably harsh punishments.

I was attending the Securities Enforcement Forum, a gathering of top regulators and white-collar defense worthies. The marquee section was a panel that included Andrew Ceresney, the current enforcement director of the SEC, and five of his predecessors. Four of those former S.E.C. officials represent corporations at prominent white-collar law firms. [...] The conference turned into a free-for-all of high-powered and influential white-collar defense lawyers hammering regulators on how unfair they have been to their clients, some of America’s largest financial companies.


This is how power and influence work in Washington. Former top officials, whose portraits mount the walls, weigh in on matters of enforcement. Now working for the private sector, they assail the regulatory “overreach.” Sincerely held or self-serving, these views carry weight in Washington’s clubby legal milieu.


Former regulators are the mouthpieces. And given what they say in public, one can only imagine what is happening behind closed doors.”

Voluntary Disclosure Calculus

At the Corporate Crime Reporter, Laurence Urgenson (Mayer Brown) talks about, among other topics, voluntary disclosure.

“Voluntary disclosure is still an important option in dealing with FCPA risk,” Urgenson said. “It used to be the default position — people had a predisposition toward it. It’s moved from the default position to one taken only after a clear-eyed case by case analysis of the benefits and the costs.” “That’s because the benefits and costs of voluntary disclosure have shifted. Part of that is the result of globalization. Part of it has to do with the increased penalties.” “It used to be that the Department of Justice and the SEC could provide companies with one stop shopping. If you volunteered to the Department and SEC, and you settled the matter, you had finality.” “That was a big benefit of the voluntary disclosure process. Now, because in part of the high penalties and globalization, the Department and SEC resolution can be the first stop in a long journey, which includes dealing with law enforcement authorities around the world, dealing with NGOs such as the World Bank which has an enforcement process, and navigating the risks of civil litigation.” “Once the Department of Justice resorted to the alternative fine provisions, which greatly increases the potential fines and once the SEC began to use the disgorgement remedy, FCPA settlements became much more costly, so much so that they could affect the stock price and provoke civil actions.” “You really have to sit down with the client and look at the list of pluses and minuses to voluntary disclosure. You have to go through with the client the long list of things that follow from voluntary disclosure.”

Nice Payday But What Was Really Accomplished?

As highlighted in this Law360 article:

“Alcoa Inc. shareholders on Monday asked a Pennsylvania federal judge to approve a settlement between shareholders and the board over allegations that the company paid hundreds of millions of dollars in illegal bribes to government officials in Bahrain. The proposed agreement states that aluminum producer Alcoa “has adopted or will adopt” compliance reforms that include the creation of a chief ethics and compliance officer, an officer-level position that oversees the ethics and compliance program, enhancements to the program that include the development of an anti-corruption policy, and implementation of Alcoa’s due diligence and contracting procedure for intermediaries.


The proposed settlement also provides that there be a reorganization of Alcoa’s regional and local counsel reporting structure, enhanced mandatory annual Foreign Corrupt Practices Act and employee anti-corruption training, improvements to its business expense policies, and enhancements to its compliance policies for evaluating the effectiveness of preventing corruption.

In addition, the company has agreed to pay $3.75 million to the plaintiffs’ counsel.

Alcoa admits no wrongdoing or liability under the terms of the proposed agreement.”

The issue is the same as highlighted in this prior post – nice payday, plaintiffs’ lawyer,s but what was really accomplished?

In connection with the January 2014 FCPA enforcement action against Alcoa World Alumina, Alcoa basically agreed to the same thing it agreed to do in the above settlement.  (See here at Exhibit 4).

Reading Stack

A review of my book, “The Foreign Corrupt Practices Act in a New Era” published at International Policy Digest by John Giraudo (of the Aspen Institute and formerly a chief compliance officer).  It begins:

“If you care about the rule of law, The Foreign Corrupt Practices Act in the New Era by Mike Koehler, is one of the most important books you can read—to learn how it is being eroded. Professor Koehler’s book … is a must read for people who care about law reform. It is a story of how a good law, the US Foreign Corrupt Practices Act, a criminal law that prevents companies from bribing foreign government officials has been misapplied in recent enforcement actions by the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC).”

Miller & Chevalier’s FCPA Autumn Review 2014 is here.


A good weekend to all.

FCPA-Related Securities Fraud Claims Against Avon And Former Executives Dismissed … Securities Fraud Claims Against Wal-Mart And Former CEO Go Forward

Thursday, October 2nd, 2014

As highlighted in “Foreign Corrupt Practices Act Ripples,” although courts have held that the FCPA does not provide a private right of action, plaintiffs’ lawyers representing shareholders often target directors and executive officers of companies subject to FCPA scrutiny with civil suits alleging, among other things, breach of fiduciary duty or securities fraud.

Such claims often follow a predictable pattern. In the days and weeks following an FCPA enforcement action, or even a company disclosing or otherwise being the subject of FCPA scrutiny, purported investigations are launched by plaintiffs’ firms representing shareholders and lawsuits often begin to rain down on the company, its board of directors or executive officers.

Even though such claims rarely survive the motion to dismiss stage, opportunistic plaintiffs’ counsel continue to bring such claims in what is viewed by many as a parasitic attempt to feed off of FCPA scrutiny and enforcement.

The securities fraud lawsuit against Avon Products and Andrea Jung (former Chief Executive Officer) and Charles Cramb (former Chief Financial Strategy Officer) was less worse than a typical suit, yet nevertheless suffered a similar fate.

Earlier this week, Judge Paul Gardephe (S.D.N.Y.) dismissed the claims.

The putative class action was brought on behalf of purchasers of Avon’s stock between July 2006 and October 2011 and the complaint alleged that Avon, Jung and Cramb issued materially false and misleading statements concerning Avon’s compliance with the FCPA in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

The factual portion of the opinion no doubt foreshadows the likely facts to be alleged in Avon’s upcoming FCPA enforcement action – namely that Avon allegedly made improper payments in connection to obtain Chinese government approval to engage in direct selling.

The plaintiffs alleged a variety of false and misleading statements.

As to general statements in Avon’s ethics codes and corporate responsibility reports, the court ruled (consistent with prior courts) that general statements proclaiming compliance with ethical and legal standards are not material and thus not actionable.  In the words of the court:

“[A] reasonable investor would not rely on the statements … as a guarantee that Avon would, in fact, maintain a heightened standard of legal and ethical compliance.  The … statements from the Ethics Codes and the Corporate Responsibility Reports offer no assurance that Avon’s compliance efforts will be successful, and do not suggest that Avon’s compliance systems give the Company a competitive advantage over other companies.  Instead, these statements merely set forth standards in generalized terms that Avon hoped its employees would adhere to.  Such statements are not material.”

The court did conclude that other statements in Avon’s Corporate Responsibility Report addressing concrete steps that Avon has taken to ensure the integrity of its financial reporting were material, but nevertheless dismissed claims relating to those statements on other grounds such as lack of scienter.

Plaintiffs also alleged that a variety of statements concerning Avon’s business success were false and misleading “because they did not attribute Avon’s success to the bribery of foreign officials or disclose the significant risk that, once the full extent of Avon’s illegal practices become known, the Company would be exposed to criminal and regulatory investigations, significant damage to reputation, and other losses and costs.”

As to these various statements, the court concluded that such statements could be construed as misleading – and thus actionable – but nevertheless concluded that the plaintiffs failed to plead facts sufficient to give rise to a strong inference that the defendants acted with scienter in making such statements.

In pertinent part, the court concluded that “generalized allegations founded solely on an individuals’ corporate position are not sufficient to demonstrate scienter.”  Elsewhere, the court stated that “Avon’s voluntary disclosure of alleged FCPA violations .. weigh against a finding of scienter.”

Another set of plaintiffs’ allegations concerned a whistleblower letter allegedly received by Jung and how this letter allegedly gave rise to a strong inference of scienter that Jung knew of bribery allegations in its China business operations.  However, the court rejected this claim and cited other court decisions standing for the proposition that “defendants are permitted a reasonable amount of time to evaluate potentially negative information and to consider appropriate responses before a duty to disclose arises.”

While the above Avon FCPA-related civil suit was dismissed, not all suits are dismissed.

Recently, in this decision, U.S. District Judge Susan Hickey (W.D. Ark.) adopted a previous magistrate judge’s recommendation denying Wal-Mart and former CEO Michael Duke’s motion to dismiss securities fraud class action claims arising from the company’s FCPA scrutiny.

In pertinent part, the plaintiffs allege that Wal-Mart’s December 2011 FCPA disclosure (see here for prior coverage) deceived the investing public by omitting the fact that Wal-Mart learned of suspected corruption in 2005 and conducted an internal investigation in 2006 (“2005-2006 events”).

According to Plaintiff, the statement was misleading because it could have left investors with the impression that Defendants first learned of the suspected corruption in fiscal year 2012, promptly began an investigation, and then referred the matter to the DOJ and SEC.

The court agreed with the prior magistrate judge’s recommendation that Plaintiff sufficiently alleged that Defendants’ omission from their 2011 statement of the 2005-2006 events renders that statement materially misleading to a reasonable investor. According to the court, the magistrate judge “correctly noted that, without any reference to the 2005 and 2006 events, a reasonable investor could have been left with the impression that Defendants first learned of the suspected corruption in fiscal year 2012, which prompted their investigation and self-reporting to the SEC and DOJ.”

In short, the Court agreed with the magistrate judge “that it is likely that the disclosure of the 2005-2006 events would have been viewed by a reasonable investor as having significantly altered the total mix of information available.”

In the words of the court:

“[The magistrate judge] correctly identified that the issue here is whether Defendant omitted a material fact from the December 2011 statement. She then found that the statement, because of the omission, could have left a reasonable investor with the impression that Defendants first learned of the suspected corruption during fiscal year 2012—an impression that would be untrue. The Court agrees with [the magistrate judge's] conclusion that Plaintiff sufficiently alleges an actionable materially misleading statement.”

As to scienter, the court stated:

“Here, [the magistrate judge] found that Plaintiff sufficiently alleges that when Defendants made the December 2011 statement, they knew certain facts or had access to information suggesting that this statement was not entirely accurate. Plaintiff allege that, in October 2005, a top Wal-Mart attorney gave a detailed description of the suspected corruption allegations to Duke and that Duke rejected calls for a legitimate independent investigation in 2006 and instead assigned the investigation to the very office implicated in the corruption scheme. Plaintiff further alleges that Wal-Mart recognized the materiality of the 2005-2006 events because it reported these events in a June 2012 form.

Plaintiff also alleges that Defendants knew that the omission in the December 2011 statement of the 2005-2006 events was materially misleading. The information that Defendants consciously chose to omit include facts about when and how Defendants first learned of the suspected corruption and how they first responded to these allegations. It was only after the New York Times article was published that Defendants acknowledged that the suspected corruption was the subject of allegations in 2005 and that there were questions about how Defendants handled these allegations in 2005-2006. Plaintiff alleges that this shows that Defendants were concerned about exposure of their alleged mishandling of the suspected corruption. The inference that Defendants intentionally omitted certain information is just as strong, if not stronger, than any competing plausible inference. The Court agrees with [the magistrate judge's] straightforward reasoning and conclusion that Plaintiff sufficiently alleges allegations that both Defendants acted with the requisite scienter.”

Second Circuit – “There Is No Private Right Of Action Under The Antibribery Provisions Of The FCPA”

Thursday, September 25th, 2014

In a September 18th decision, the Second Circuit concluded in Republic of Iraq v. ABB et al that “there is no private right of action under the antibribery provisions of the FCPA.”

The FCPA issue was a minor component of the Second Circuit’s decision in the long-running civil RICO case in which Iraq sought recovery from a long list of defendants for their “alleged conspiracy with Iraq’s then-president Saddam Hussein and Iraq’s ministries to corrupt and plunder the Oil-for-Food Program, an international humanitarian program administered by the United Nations during the final years of Hussein’s rule.”  As to the primary RICO claim, the Second Circuit affirmed the trial court’s dismissal of the claim on the grounds that, among other things, the plaintiff was in pari delicto with defendants.

Notwithstanding the fact that previous FCPA enforcement actions concerning the Oil for Food Program were largely books and records and internal controls cases only because the alleged bribe payments went to the government, not a particular foreign official as required under the anti-bribery provisions, and notwithstanding the fact that Iraq was a unique plaintiff to say the least, it nevertheless brought FCPA claims against the defendants on the theory that the FCPA allowed for a private right of action.

As to this issue, the Second Circuit stated – in full – as follows.

“The Amended Complaint alleged that the surcharges and kickbacks paid by the Vendor and Oil Purchasing Defendants violated the antibribery provisions of the FCPA. The Republic contends that the district court should have recognized an implied private right of action for violations of those provisions despite a consistent line of cases holding to the contrary. The Republic is particularly critical of Lamb v. Phillip Morris, Inc., 915 F.2d 1024 (6th Cir. 1990) (“Lamb”), cert. denied, 498 U.S. 1086 (1991), the leading case declining to recognize such a cause of action. The Republic argues that Lamb erred in its analysis of the legislative history of the FCPA and that that history suggests that the reason Congress did not expressly provide for a private right of action was to avoid creating a “negative inference” that would dissuade judicial recognition of implied private rights of action under other provisions of the Securities Exchange Act of 1934, to which the FCPA was an amendment. We are unpersuaded.

“[P]rivate rights of action to enforce federal law must be created by Congress.” Alexander v. Sandoval, 532 U.S. 275, 286 (2001) (“Sandoval”). A federal statute may create a private right of action either expressly or, more rarely, by implication. In considering whether a statute confers an implied private right of action, “[t]he judicial task is to interpret the statute Congress has passed to determine whether it displays an intent to create not just a private right but also a private remedy.” Id. To discern Congress’s intent, “we look first to the text and structure of the statute.” Lindsay v. Association of Professional Flight Attendants, 581 F.3d 47, 52 (2d Cir. 2009), cert. denied, 11 130 S. Ct. 3513 (2010). To “illuminate” this analysis, id. at 52 n.3, we also consider factors enumerated in Cort v. Ash, 422 U.S. 66 (1975), which include the following:

First, is the plaintiff one of the class for whose especial benefit the statute was enacted, . . . –that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? . . . . Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? Id. at 78 (emphasis in Cort v. Ash) (internal quotation marks omitted). In our analysis, we are mindful that “the Supreme Court has come to view the implication of private remedies in regulatory statutes with increasing disfavor.” Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 618 (2d Cir. 2002).

The antibribery provisions of the FCPA prohibit certain entities and persons from, inter alia, corruptly making payments to foreign officials for the purpose of influencing official action in order to obtain business. See 15 U.S.C. §§ 78dd-1(a), 78dd-2(a), 78dd-3(a). The text of the statute contains no explicit provision for a private right of action, although it does provide for civil and criminal penalties, see id. §§ 78dd-2(g), 78dd-3(e), 78ff(c), and permits the Attorney General to seek injunctive relief, see id. §§ 78dd-2(d), 78dd-3(d). Because “[t]he express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others,” Sandoval, 532 U.S. at 290, the structure of the statute, by focusing on public enforcement, tends to indicate the absence of a private remedy.

The Cort v. Ash factors also do not support recognition of a private right. The statute’s prohibitions focus on the regulated entities; the FCPA contains no language expressing solicitude for those who might be victimized by acts of bribery, or for any particular class of persons. “Statutes that focus on the person regulated rather than the individuals protected create no implication of an intent to confer rights on a particular class of persons.” Sandoval, 532 U.S. at 289 (internal quotation marks omitted).

Nor does the legislative history of the FCPA demonstrate an intention on the part of Congress to create a private right of action. As discussed in Lamb, 915 F.2d at 1029, a bill introduced by Senator Church in the 94th Congress included an express right of action for competitors of those who bribed foreign officials, see S. 3379, 94th Cong. § 10, 122 Cong. Rec. 12,605, 12,607 (1976); that provision, however, was deleted by a committee of the Senate, see S. Rep. No. 94-1031, at 13 (1976).

In the 95th Congress, which finally enacted the FCPA, a committee of the House of Representatives, in reporting out a bill that did not provide expressly for a private right of action, made a statement that the House “Committee intends that the courts shall recognize a private cause of action based on this legislation . . . on behalf of persons who suffer injury as a result of prohibited corporate bribery,” H.R. Rep. No. 95-640, at 10 (1977). We have three main problems with the Republic’s reliance on this statement, and other aspects of the FCPA’s legislative history, as justification for judicial implication of a private right of action in its favor

First, the House committee’s statement was not repeated (and no endorsement of its substance was in any way suggested) in the reports of either the Senate committee considering the FCPA or the conference committee that reconciled the views of the House and Senate to produce the language of the FCPA as it was ultimately enacted. See S. Rep. No. 95-114 (1977); H.R. Rep. 95-831 (1977). Indeed, in the debate on the conference committee report, one conferee stated that the question of whether “courts will recognize [an] implied private right of action . . . . was not considered in the Senate or during the conference, and thus [it] cannot be said that any intent is expressed at all on this issue.” 123 Cong. Rec. 38,601, 38,602 (1977) (statement of Sen. Tower) (emphasis added).

Second, although the legislative history contains additional references to the desirability of a private right of action, they do not provide any clear indication of congressional intent to create one. See generally Siegel, The Implication Doctrine and the Foreign Corrupt Practices Act, 79 Colum. L. Rev. 1085, 1105-12 (1979) (canvassing the legislative history in detail and finding “no conclusive evidence of congressional intent to grant private actions”).

Third, we note that this case illustrates the wisdom of Lamb, which avoids the question of what class of parties the FCPA was designed to protect. Although we agree that the statute was ”primarily designed to protect the integrity of American foreign policy and domestic markets,” Lamb, 915 F.3d at 1029, one might argue that it is principally the foreign governments whose processes might be corrupted. The Republic’s claim highlights the obvious problem with the latter concern here: The foreign government supposedly to be “protect[ed]” by the FCPA was the entity that demanded the bribes in the first place.

Finally, we note that although it has been nearly a quarter of a century since Lamb was decided, and although Congress has more recently amended the FCPA, see International Anti-Bribery and Fair Competition Act of 1998, Pub. L. No. 105-366, 112 Stat. 3302 (1998), Congress has not chosen to override Lamb. We conclude that there is no private right of action under the antibribery provisions of the FCPA and that the district court did not err in dismissing the Republic’s FCPA claims.”

As indicated in the Second Circuit’s decision, there have been previous appellate court decisions addressing whether the FCPA has a private right of action.  As highlighted in this prior post, the Sixth Circuit addressed the issue in Lamb v. Phillip Morris Inc., 915 F.2d 1024 (6th Cir. 1990).  The primary reason articulated by the court for declining a private right of action was something that never happened – at least until 2012 when the DOJ/SEC issued FCPA Guidance.  The Sixth Circuit stated:

“Recognition of the plaintiffs’ proposed private right of action, in our view, would directly contravene the carefully tailored FCPA scheme presently in place. Congress recently expanded the Attorney General’s responsibilities to include facilitating compliance with the FCPA. See 15 U.S.C. §§ 78dd-1(e), 78dd-2(f). Specifically, the Attorney General must ‘establish a procedure to provide responses to specific inquiries’ by issuers of securities and other domestic concerns regarding ‘conformance of their conduct with the Department of Justice’s [FCPA] enforcement policy….’ 15 U.S.C. §§ 78dd-1(e)(1), 78dd-2(f)(1). Moreover, the Attorney General must furnish ‘timely guidance concerning the Department of Justice’s [FCPA] enforcement policy … to potential exporters and small businesses that are unable to obtain specialized counsel on issues pertaining to [FCPA] provisions.’ 15 U.S.C. §§ 78dd-1(e)(4), 78dd-2(f)(4). Because this legislative action clearly evinces a preference for compliance in lieu of prosecution, the introduction of private plaintiffs interested solely in post-violation enforcement, rather than pre-violation compliance, most assuredly would hinder congressional efforts to protect companies and their employees concerned about FCPA liability.”

Prior to Lamb, the Fifth Circuit addressed a private right of action, albeit in dicta, in McLean v. Int’l Harvester Co., 817 F.2d 1214 (5th Cir. 1987).  The court stated:  ”we find it inappropriate to imply a private cause of action from the statute. The statute on its face shows no congressional intent to create a private action. Moreover, no legislative history exists referring to such an intent.” This last sentence is obviously false given the legislative history discussed in the recent Second Circuit opinion.

In short, the three appellate court decisions that address an FCPA private right of action are either: (1) based on a false premise (McLean); (2) based on a false premise at the time (Lamb); or (3) involved a unique and odd plaintiff.

An FCPA private right of action does warrant further consideration.

At the very least, this much should be undisputed:  if there was an FCPA private right of action, there would be substantially more case law of precedent concerning the FCPA’s provisions than currently exists and that, I submit, would be a good thing.

Contrary to the Second Circuit’s statement, courts have inferred private rights of action in several provisions of the ’34 Act (see e.g., J.I. Case v. Borak, 377 U.S. 426 (1964)) and the FCPA is after all part of the ’34 Act. Moreover, several of the Cort v. Ash factors for implying a private of right would seem to be met in the FCPA context.  Among the reasons Congress passed the FCPA was to level the playing field given how the discovered foreign corporate payments distorted free and fair competition.  Moreover,  the SEC itself has said on numerous occasions that FCPA enforcement is central to its mission of investor protection.  An FCPA private right of action would further seem to be consistent with the underlying premise of the FCPA which is to reduce foreign bribery.  Finally, “regulation of bribery directed at foreign officials cannot be characterized as a matter traditionally relegated to state control,” as even the Lamb court recognized.

As highlighted in prior posts here, here and here, for several years U.S. Representative Ed Perlmutter (D-CO) consistently introduced the “Foreign Business Bribery Prohibition Act” which would have provided for a limited private right of action under the FCPA.  The bills never made it out of committee.

An FCPA Enforcement Action With Many Interesting Wrinkles

Wednesday, August 27th, 2014

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

The 1998 Foreign Corrupt Practices Act enforcement action against Saybolt Inc., Saybolt North America Inc. and related individuals had many interesting wrinkles:  a unique origin; a rare FCPA trial; a fugitive still living openly in his native land; and case law in a related civil claim.

As to the unique origin, Saybolt Inc. was a U.S. company whose primary business was conducting quantitative and qualitative testing of bulk commodities, such as oil, gasoline, and other petrochemicals, as well as grains, vegetable oils and other commodities.  The Environmental Protection Agency, Criminal Investigation Division (“EPA-CID”) was investigating the company for allegedly submitting false statements to the EPA about the oxygen content of reformulated gasoline blended in accordance with the requirements of the Clean Air Act.  The investigation was initiated by reports of data falsification at Saybolt’s Massachusetts facility.

During the course of the investigation EPA-CID interviewed Steven Dunlop (the general manager for Latin American operations for Saybolt) who provided the following information.

During a trip to Panama in 1994, Dunlop was advised of new business opportunities that were being offered to Saybolt Panama through the Panamanian Ministry of Commerce and Industries.  Specifically, the DOJ’s criminal complaint alleged that Hugo Tovar (the General Director of the Hydrocarbon Directorate, a division of the Ministry of Commerce and Industries) and Audo Escudero (the Sub-Director of the Hydrocarbon Directorate), offered to Saybolt Panama an opportunity to: (1) receive a substantial reduction in Saybolt Panama’s tax payments to the government of Panama; (2) obtain lucrative new contracts from the government of Panama; and (3) secure a more permanent facility for Saybolt Panama’s operations on highly coveted land near the Panama Canal.  According to the criminal complaint, this parcel of land was coveted because Saybolt Panama “only had a tenuous legal claim on its existing facility” and as a result its operations were continually at risk.

The complaint details various communications between Dunlop and David Mead (the President and CEO of Saybolt) in which Dunlop informed Mead of a $50,000 “fee” that would be needed to accomplish the above opportunities.

The complaint details a 1995 board of directors meeting at Saybolt during which discussion concerned the “$50,000 payoff demanded by the Panamanian officials with whom Saybolt was negotiating.  According to the complaint, present at this meeting were Board members Frerik Pluimers and Philippe Schreiber as well as Mead and Saybolt’s Chief Financial Officer Robert Petoia.  According to the complaint, Dunlop received instructions from Mead that he was to “take the necessary steps to ensure that the $50,000 was paid to the Panamanian officials in order to secure the deal” and that Schreiber was to be his primary contact on all issues concerning the Panamanian transaction.

According to the complaint, “in the minutes leading up to the time he was scheduled to leave his house for the airport” to travel to Panama,” Dunlop had a telephone conversation with Schreiber who advised him “that the action [he] was about to take would constitute a violation of the FCPA.”

According to the complaint, while in Panama Dunlop “learned that the Saybolt funds needed to make” the payment had not yet been received and that Dunlop then tried to contact Mead.  According to the complaint, Mead sent Dunlop an e-mail which stated: “Per telecon undersigned and capo grande Holanda the back-up software can be supplied from the Netherlands.  As previously agreed, you to detail directly to NL attn FP.” According to the complaint, “capo grande Holanda” was a reference to Pluimers (the President of the Dutch holding company that controlled Saybolt, Inc.” and the “back-up software” was a reference to the $50,000 payment.”

The complaint alleged that the funds never arrived in Panama and that Dunlop was receiving pressure from the Panamanian officials “to make the $50,000 payment prior to the upcoming Christmas holidays.”  According to the complaint, Mead told Dunlop on a telephone call to make the $50,000 payment using funds that were in the operating account of Saybolt Panama.

According to the complaint, the $50,000 in cash was obtained by laundering a check through a local construction company and that a “sack full of currency” was handed over to Escudero at a bar in Panama City by the individual who was serving as Saybolt Panama’s liaison with Escudero.  Further, according to the complaint, “shortly after this payment was made, the Ministry of Commerce and Industries and other necessary government agencies acted favorably on Saybolt’s proposal.”

In April 1998, the DOJ filed this indictment against Mead (a citizen of the U.K. and resident of the U.S. and Pluimers (a national and resident of the Netherlands) based on the above conduct.  The indictment charged Mead and Pluimers with conspiracy to violate the FCPA’s anti-bribery provisions and the Travel Act, two substantive violations of the FCPA, and two substantive violations of the Travel Act.

According to the indictment, the purposes and objectives of the conspiracy were:

  • To obtain contracts for Saybolt de Panama and its affiliates to perform import control and inventory inspections for the Ministry of Hydrocarbons, and the Ministry of Commerce and Industries, both departments of the Government of the Republic of Panama;
  • To obtain and to expedite tax benefits for Saybolt de Panama and its affiliates from the Government of the Republic of Panama, including exemptions from import taxes on materials and equipment and reductions in annual profit taxes;
  • To obtain from an agency of the Government of the Republic of Panama a secure and commercially attractive operating location for an inspection facility in Panama; and
  • To “lock out” Saybolt’s competitors by retaining possession and control of Saybolt de Panama’s existing location in Panama.

In September 1998, the DOJ filed this superseding indictment substantially similar to the first and including the same charges.

Mead moved to strike the indictment of allegations that he violated the FCPA and for dismissal of the indictment for failure to state an offense under the Travel Act, and for a Bill of Particulars.   In a one page order, U.S. District Court Judge Ann Thompson denied the motions. Dunlop was given full immunity as was the American attorney present at the board meeting and involved in several conversations with Pluimers, Mead, and Dunlop concerning the alleged payments.

Mead argued that the FCPA only prohibited payments to assist a domestic concern in obtaining and retaining business” and he used Saybolt’s rather complex corporate structure to argue that the business sought to be obtained or retained was for a different Saybolt entity, not a domestic concern.  In his motion, Mead stated “because the government ignores the corporate legal structure and does violence to the FCPA by attempting to end-run congressional policy, the Court must justifiably refuse.”  Elsewhere, the motion stated:

“Whether the government labels foreign corporations as ‘agents of a domestic concern’ or members of an ‘unincorporated organization,’ the government still may not manipulate the Act’s broad language to end-run this congressional policy (of deliberately excluding both foreign subsidiaries and non-subsidiary foreign corporations from FCPA liability).”

The motion also argued that the indictment was devoid of any allegation that Mead acted “willfully” (i.e. with the specific intent to violate the law) because he followed the legal advice of counsel in making the alleged payments.

In response, the DOJ stated that the indictment “describes in detail how Mead – himself a U.S. resident, and also the President of one U.S. corporation (Saybolt Inc.), Executive Vice-President of a second U.S. corporation (Saybolt North America Inc.), and Chief Executive Officer of an unincorporated association (Saybolt Western Hemisphere) – and others decided to send a Saybolt Inc. employee to Panama City, Panama, to oversee the payment of a $50,000 bride, which they believed would be provided to high level government officials, in exchange for favorable treatment of Saybolt’s business interests in Panama.  The Indictment charges that Mead gave the order to go forward with the bribe and it details the contents of the e-mail message that Mead sent from his office in New Jersey to the Saybolt employee in Panama City.”

At trial, Mead argued that the Government failed to meet its burden of proof and that he acted in good faith belief that the payment to the Panamanian officials was lawful.  The relevant jury instructions stated as follows.

“If the evidence shows you that the defendant actually believed that the transaction was legal, he cannot be convicted.  Nor can he be convicted for being stupid or negligent or mistaken.  More is required than that.  But a defendant’s knowledge of a fact may be inferred from “willful blindness” to the knowledge or information indicating there was a high probability that there was something forbidden or illegal about the contemplated transaction and payment.  It is the jury’s function to determine whether or not the defendant deliberately closed his eyes to the inferences and the conclusions to be drawn from the evidence here.”

According to this docket sheet, Mead’s trial occurred in October 1998 and he was found guilty of all charges.  According to the docket, Mead was sentenced to four months imprisonment, to be followed by four months of home confinement, to be followed by three years of supervised release.  According to the docket, he was also ordered to pay a $20,000 criminal fine. After sentencing, US Attorney Donald Stern of Boston, stated: ”This sentence puts American executives on notice there will be a price to pay, far more than the monetary cost of the birbe, when they buy off foreign officials.”  For additional reading on Mead’s case, see this transcript of an in-depth CNN story about Mead that aired in 1999.

What about Pluimers?

As indicated by this docket sheet, there has been no substantive activity in the case since 1999 and Pluimers remains a fugitive – albeit living openly in his native Netherlands.  According to this 2011 New York Times article citing a Wikileaks cable, “Pluimers simply has too much influence with high-ranking Dutch officials to be handed over to U.S. authorities.”

What about Saybolt?

In August 1998, the DOJ the filed two separate criminal informations against Saybolt Inc. and its parent corporation Saybolt North American Inc. The first information charged Saybolt with conspiracy and wire fraud related to the company’s “two year conspiracy to submit false statements to the EPA about results of lab analyses. The second information charged Saybolt and Saybolt North America with conspiracy to violate the FCPA and one substantive charge of violating the FCPA.

As noted in this plea agreement, Saybolt agreed to plead guilty to all charges in the informations and agreed to pay a total fine of $4.9 million allocated as follows:  $3.4 million for the data falsification violations and $1.5 million for the FCPA violation. Saybolt also agreed to a five year term of probation.

The conduct at issue in the Saybolt and related enforcement actions also spawned a related civil malpractice action alleging erroneous legal advice by counsel regarding the above-described payments to Panamanian officials.  In Stichting v. Schreiber, 327 F.3d 173 (2d Cir. 2003), the Second Circuit analyzed whether a company, in pleading guilty to FCPA anti-bribery violations, acknowledged acting with intent thus undermining its claims that the erroneous legal advice was the basis for its legal exposure.

The court stated:

“Knowledge by a defendant that it is violating the FCPA – that it is committing all the elements of an FCPA violation – is not itself an element of the FCPA crime.  Federal statutes in which the defendant’s knowledge that he or she is violating the statute is an element of the violation are rare; the FCPA is plainly not such a statute.”

The court also stated concerning “corruptly” in the FCPA:

“It signifies, in addition to the element of ‘general intent’ present in most criminal statutes, a bad or wrongful purpose and an intent to influence a foreign official to misuse his official position.  But there is nothing in that word or anything else in the FCPA that indicates that the government must establish that the defendant in fact knew that his conduct violated the FCPA to be guilty of such a violation.”

Wal-Mart Delaware Action – Much To Do About Little

Monday, July 28th, 2014

There are certain topics in the FCPA space that are over-hyped.

The document request dispute in connection with a Wal-Mart derivative action is certainly one example.

By way of background, in the aftermath of Wal-Mart’s Foreign Corrupt Practices Act scrutiny, shareholders (as is fairly typical in instances of FCPA scrutiny) filed derivative actions against the company and various current or former officers and directors alleging, among other things, breach of fiduciary duties.  Derivative actions are subject to specific pleading rules and in connection with its filed complaint the Indiana Electrical Workers Pension Trust Fund (“Plaintiff”) made certain demands on Wal-Mart under Section 220 of the Delaware General Corporation Law.  Titled ”Inspection of Books and Records,,” Section 220 governs a stockholder’s right to inspect certain corporate books and records.

In response to Plaintiff’s Section 220 Demand, Wal-Mart agreed to make certain documents available, but declined to provide documents that it determined were not necessary and essential to the stated purposes in the Demand or that were protected by the attorney-client privilege or work-product doctrine.  To resolve the disputed document request issues, the Delaware Court of Chancery (a trial court) ordered Wal-Mart to produce certain additional documents.

Wal-Mart disagreed with the Court of Chancery’s order and filed an appeal with the Delaware Supreme Court arguing that the trial court erred in ordering Wal-Mart to produce documents that far exceeded the proper scope of Section 220 requests.

Despite the rather pedestrian nature of the document request dispute, some saw (or perhaps were hoping to see) monumental issues.

This FCPA Blog post sought to explain “why the issues before the Delaware Supreme Court are important to all compliance officers and corporate stakeholders, and how the outcome could influence compliance programs globally for decades to come.” Why was the Wal-Mart dispute, according to the FCPA Blog commentator, so important?

“Because at the heart of the appeal is the question of what misconduct by directors so taints them that shareholders are allowed to proceed with a civil complaint. When can directors be absolved from directing an internal FCPA investigation? And when can they ignore red flags of overseas misconduct and conduct business as usual?”

As highlighted below, none of these issues were on appeal to the Delaware Supreme Court.

Further, this FCPA Blog post stated that Wal-Mart’s appeal “could be the right forum for landmark changes to guide executives, directors, and compliance professionals for decades” and the commentator was hoping for the Delaware Supreme Court to “seize the opportunity to paint on the largest canvas possible, to illuminate new roles for those we’ve put in charge of compliance.”

As highlighted below, this did not happen either.

Hype aside, as framed by the Delaware Supreme Court in its decision, ”the sole issue presented for judicial determination was whether Wal-Mart produced all of the documents that were responsive to [Plaintiff's] Demand.”  Under the “necessary and essential” test applicable to Section 220 proceedings, and reviewing the Court of Chancery’s order under the abuse of discretion standard, the Supreme Court determined that all issues on appeal (both issues raised by Wal-Mart as well as Plaintiffs) were without merit and therefore affirmed the Court of Chancery order.

Specifically, as to the Plaintiff’s demand for officer-level documents, the court concluded that “officer-level documents are necessary and essential to determining whether and to what extent mismanagement occurred and what information was transmitted to Wal-Mart’s directors and officers.”

In its decision, the Supreme Court also addressed certain pedestrian issues such as the relevant dates of production, disaster recovery tapes for two document custodians, and the precision and specificity of certain document requests.

The Delaware Supreme Court also addressed an issue on appeal not presented to the Court of Chancery concerning the so-called Garner doctrine (a fiduciary exception to the attorney-client privilege in which stockholders are allowed to invade the corporation’s attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon showing good cause).

In its decision, the Supreme Court acknowledged its previous dicta statements in which it endorsed the Garner doctrine in a Section 220 proceeding and agreed with previous Court of Chancery decisions applying the Garner doctrine in a Section 220 proceeding.

Applying the Garner doctrine to the Plaintiffs’ Section 220 demand, the Supreme Court agreed with the Court of Chancery that the Plaintiffs established good cause to order the privileged documents be produced because the Plaintiffs “had demonstrated a colorable claim against Wal-Mart” and that the information sought was not available via other means.  In short, the Supreme Court stated:

“The record supports the Court of Chancery’s conclusion that the documentary information sought in the Demand should be produced by Wal-Mart pursuant to the Garner fiduciary exception to the attorney-client privilege.”

The Supreme Court further found that the Court of Chancery properly ruled that Plaintiffs’ demands for certain work-product documents were legitimate under a relevant Court of Chancery rule because the relevant Garner factors overlapped with the required showings necessary under the rule.

In short, the issues presented to the Delaware Supreme Court, and the Court’s decision, merely concerned document issues relevant to pre-trial pleading requirements in a derivative action – hardly the momentous issues some had reported or predicted.

Moreover, although the Delaware Supreme Court appeal was viewed as Wal-Mart’s appeal, as a matter of fact, the Plaintiff also filed cross-appeals which the Supreme Court also deemed to be without merit.  The Supreme Court denied the Plaintiffs request that Wal-Mart should collect documents from additional custodians and also denied the Plaintiffs’ challenge to the Court of Chancery’s order requiring it to return to Wal-Mart certain privileged documents that were delivered to its counsel by an anonymous source.

For oral argument of the Delaware Supreme Court hearing, see here.